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Utility companies’ raison d’etre is delivering power to consumers, which they do from the relative safety of monopolistic markets. This has been the case for over a century but those days are fading fast. The combination of renewable energy and battery storage has the potential to drastically shake up the industry over the next 5-10 years. Cheap green energy and increasingly cheap battery storage may together soon be priced low enough to challenge the old power providers. With added impetus from regulators setting ambitious renewable energy targets, the utility sector is ripe for a revolution.
100 years of solitude
Many power providers have roots in the late 19th century. Thomas Edison’s invention of the incandescent lamp was, literally, a light bulb moment for industry, creating an entire ecosystem just as the internet has done today. With the light bulb came demand for electricity, which in turn required infrastructure and energy sources. Savvy industrialists including Edison, George Westinghouse and Nikola Tesla made agreements with municipalities to dig up roads and install street lighting systems: the electric utility industry had fired up.
Fast forward 50 years to the early 20th century, and the importance of power was obvious - especially to politicians. Governments started to pass laws designating electric utilities as public goods, which brought close oversight but serendipitously speeded up the development and integration of transmissions grids. The basic structure of the industry was set, with companies taking the form of either state-owned enterprises or private local monopolies subject to government-controlled price regulation.
The types of energy sources used to create electricity evolved, with water wheels and steam giving way to fossil fuels and nuclear, and more recently, an increasing role for renewable energy. A timid, rather than ‘big bang’ moment came in the 1980s when many countries began reversing nationalisation and privatised the sector. But tight regulation remained, and the only difference to consumers was the logo on electricity meters. Now, however, the whiff of change is unmistakeable. We are on the cusp of a historical transformation driven by renewable energy and the humble battery.
Diagram 1: Modern electricity generation structure
For illustration purposes only. Source: Fidelity International, January 2019
In the US, two-thirds of new power capacity is either solar or wind energy. For several years - before Donald Trump assumed the presidency - authorities had been encouraging more environmentally friendly power generation, spurred by the need to meet climate change targets. Even with the current central administration’s hostility to mainstream climate change theory, individual states in the US have taken it upon themselves to fulfil the goals. California and Hawaii have even committed to 100% renewable energy generation by 2045.
Climate change is a key driver for adopting renewable power, but the other crucial factor is the fall in the cost of green energy. The price of renewable energy has come down so much in recent years that even on an unsubsidised basis it is now cheaper, unit-for-unit, than fossil fuels. But it still has one major handicap compared to non-renewables - its unpredictability. Even wind farms in the windiest locations only produce power around 40 per cent of the time. The missing piece of the puzzle to make renewable energy truly competitive is the lithium battery.
Calculated as levelised cost of energy (LCOE), which is the net present value of electricity over the lifetime of a generating asset. Source: Lazard, November 2018
On 6 January 2014, just a couple of miles down the road from the Capitol Building where Janet Yellen was being confirmed by the Senate as the first female Fed Chairman, the National Academy of Sciences quietly awarded John Goodenough the Charles Stark Draper Prize for 2014 - the ‘Nobel Prize of engineering’. While tinkering away in the chemistry labs of Oxford University in the 1980s, Goodenough (pronounced ‘good enough’), invented the basis on which most modern batteries operate.
Goodenough found a way to harness lithium - the lowest density metal with the greatest electrochemical potential - to create a rechargeable storage form: the lithium-ion battery. It’s able to deliver high voltages in compact and light volumes, but there’s a snag: lithium-ion batteries have a habit of catching fire.
Not one to be defeated, Goodenough followed up his first act with another scene stealer. By introducing lithium-ion to phosphate, he built a thermally stable lithium-ion cathode, and, the world was changed. His batteries have the best energy to mass ratio, are very slow to discharge thus providing excellent storage, and are malleable to any shape. It’s no surprise the lithium-ion battery caught on: the market is now worth over USD 30 billion per year, and it’s going to get much bigger.
The lithium battery is developing fast as new applications emerge and consumer demand grows. Companies are racing to build ever more efficient and higher capacity batteries, with the size of the market forecast to reach over USD 100 billion a year in the next 10 years. Electric vehicle company Tesla is planning its third ‘Gigafactory’ to churn out ever greater battery packs, and it’s already producing batteries able to run domestic households. These developments are good for consumers, but a challenge for conventional utilities. The electric power industry as we know it could soon be upended.
Diagram 2: How a modern battery works
For illustration purposes only. Source: Fidelity International, January 2019
Electric shock therapy
Power companies are going to face a formidable new contender to their quasi monopolistic arrangement - or, more accurately, lots of smaller new rivals that combine into a big force.
High-capacity, lithium-ion batteries can store large amounts of energy until it’s needed, enabling ‘time shift’ as it’s known in the business. This removes the irregularity of renewable power generation to even out its output. It’s this combination of cheap green energy and effective storage that’s so perilous for electricity’s old guard.
Although the total cost of a renewable energy plant plus battery storage facilities is higher than that of conventional plants, it is falling quickly and they are easier to set up. We think that sometime in the early 2020s renewable energy plus battery storage power will become cheaper than traditional plants, opening up the energy supply field to a host of new players.
In theory, it is possible that once mass-produced, affordable, high-capacity batteries are readily available, an industrious homeowner, blessed with a sunny climate, could attach a solar panel to the roof and store the energy in a discreet battery pack in the basement, releasing surplus power into the grid in exchange for payment. We’re not there yet, but the democratisation of power is coming.
The implication for electric utilities is straightforward. Lots of new, cheaper supply means lower electricity prices, and, because the traditional providers aren’t supplying as much, they also face lower volumes - a scary proposition for any business. The winners will be consumers, battery manufacturers, lithium miners, renewable energy technology makers, renewable energy suppliers, installation technicians, smart grid technologies (which convert grids so that electricity can flow in both directions) and the planet (mostly). The losers will be the left-behind electricity companies.
Electric utilities, aware of the threat, have begun to re-position themselves, with many joining the renewables trend. In the US, some have pursued solar technologies because of a front-loaded 30 per cent investment tax credit which also counts towards storage costs if paired with a solar plant. Wind has also benefited from federal tax breaks, specifically a production tax credit. The aggressive embrace of wind has led to a 20-fold increase in installed wind capacity in the US since 2001.
But the unfettered liberalisation of the electricity industry is not inevitable - there are still a number of hurdles to negotiate. Any one of them could stall the democratisation of power.
Diagram 3: The power of batteries to disrupt
Potential locations and applications of electricity storage in the power system. For illustration purposes only. Source: Fidelity International, January 2019
Average of low-end and high-end prices used. Source: Fidelity International, Lazard, November 2018
In an electrical circuit, variable resistors break the flow of energy. They can either partially disrupt it, or completely block it. Similarly, impediments to the mass acceptance of battery energy storage can slow down its progress or derail it altogether. The biggest obstacle lies with the regulators.
Regulators hold enormous influence, and in the absence of a globally aligned approach, their attitude will make or break battery storage adoption. Spotting the peculiarities of regulators can help understand which jurisdictions are more likely than others to be transformed by battery storage. We think the UK, California, Japan and Germany could be first in line for change, but for very different reasons.
The UK regulatory authority is technologically neutral; its agenda is to manage supply, wherever that comes from. California has demanding climate change goals to meet and anything which boosts the use of renewable power is welcome. Japan is seeking alternatives after the shock of the Fukushima nuclear disaster. Germany currently has the largest installed asset base of utility-scale battery storage, but we think it’ll be overtaken by the UK and California within 10 years because Germany’s policymakers at the federal and state level lack coordination.
Grid maintenance is another important consideration for regulators. In most countries electricity bills include a charge for grid usage, but, as self-generation increases, the cost of maintaining the grid is shared among fewer customers. If this trend goes too far it could eventually make the cost prohibitively expensive for those still using the grid, incentivising more grid users to switch to self-generation. Several regulators have already signalled they are closely watching this to ensure affordable access to electricity, but any intervention by them could affect the economics of battery storage.
Lithium-ion isn’t the only technology out there for battery storage, but we think it’s the front runner. Among the others, vanadium flow deserves a special mention. It’s an innovative energy storage method, made up of electrically chargeable liquid. Its key qualities are its zero energy loss, which beats lithium-ion’s 2-3 per cent dissipation per month, its long life cycle allowing it to be recharged over 10,000 times and its slow discharge so it can supply power for extended periods.
Although the cost of vanadium flow is falling fast, its primary drawback is that it is still very expensive. What sets lithium apart, and makes it cheap, is its scale. Lithium batteries are modular, meaning that small individual batteries are combined into packs and stacked on top of one another. Because the building blocks are the same whether the battery pack is small or large, the volume of output is the crucial driver of cost.
The adoption of lithium batteries in electrical vehicles means huge growth is expected in future lithium demand, enabling companies such as Tesla to make ‘giga-sized’ bets on the metal. The more technologies embrace lithium batteries, the more pervasive they become. Utilities have an added advantage in that battery packs are static and have little size restriction. This is quite unlike their use in electric vehicles where packs need to be small enough to fit into small spaces while still providing adequate power discharge. This helps reduce the cost of utility-scale batteries.
Most regulators are still some way from fully understanding utility-scale batteries. Many still wrangle over whether to define them as a storage form or power generation. Given regulators’ tentative approach to battery storage, the signs are that they will be less likely still to approve more experimental technology projects such as flow-based ventures, which hands the advantage to tried and tested lithium by slowing down the ability of rival technologies to catch up in scale. By 2029, lithium could be so ingrained in battery technology that it’s lead is unassailable.
Table 1: Lithium-ion generally dominates battery storage technologies
Source: Fidelity International, 2017
Peak traditional power
Many regulators are striving for more renewable energy generation, and their policies in turn drive the strategies of the companies they oversee. If a regulator demands a move to renewables then old energy producers have no choice but to switch. While regulatory policy is a central to power suppliers’ strategies however, the long-term viability of renewable energy comes down to economics: how cheap renewables plus storage are compared to other fuels.
By the mid-2020s, we could reach a tipping point where renewable energy combined with battery storage is a cheaper way to build new power supply than non-renewables. By 2029, we could well have passed the peak of traditional electricity supply and be moving into a phase where renewable power plus battery storage dominates supply globally. Electric utilities will have to adapt. They cannot take for granted that the stability they’ve enjoyed for the last century will continue; the next decade, let alone the next century, may look very different for them.